Active participation question
I have a client for whom I’ve been maxing out their IRA every year to get the deduction. Today, she told me she enrolled in her Roth 401k plan. She will invest $ 1,000 and get a $ 1,000 match. While a free 100% is nice, she is now an active participant. My question is when is she an active participant? Is it when she enrolls, when she makes her first contribution, or when the company matches the construction? The second part of my question is if it’s too late to stop the first contribution, is there anything we can do to reverse it?
Permalink Submitted by Alan - IRA critic on Tue, 2025-01-28 12:42
As soon as a contribution is made to the plan, she is an active participant for that entire year, and her W-2 should so indicate. Once any contribution (employee or employer) is made to the plan, it cannot be reversed. There is also a possibility that enrollment will improperly trigger the W-2 box even if a contribution is never made. She might ask the plan administrator if that will occur or could be prevented.
Note that if her MAGI is low enough, participation will not eliminate the IRA deduction and a pre tax 401k contribution will lower MAGI while a Roth 401k contribution will not.
Permalink Submitted by Robert Roselli on Tue, 2025-01-28 15:36
The 2025 upper limit for single or HoH is 89K. If she is at 89K, can an 8K deductible IRA contribution lower MAGI?
Permalink Submitted by Alan - IRA critic on Tue, 2025-01-28 15:59
No. A deductible IRA contribution cannot be used to reduce MAGI, but a pre tax contribution to a 401k or 403b can. See Pub 590A, worksheet 1-1, which also lists a few other deductions that must be added back to determine the MAGI for IRA deduction purposes.
If a taxpayer’s income is too high for the IRA deduction, they should consider a Roth IRA contribution, which has higher income limits.